What is integrated reporting?
The future of corporate reporting is currently the subject of considerable debate. Financial reporting has been criticised for over-complexity and requiring more disclosures, sparking accusations that corporate and financial reports are too long and not relevant, especially for the needs of investors. So could integrated reporting provide the answer?
An ACCA survey shows promising levels of interest in integrated reporting, but still a considerable degree of uncertainty. Some of the questions being asked are:
•what is integrated reporting?
•what are the benefits of integrated reporting?
•can integrated reporting improve my current reporting?
Clearly corporate reporting has developed over time but is still mainly based around the traditional set of financial statements, showing largely just financial information. In the UK, the Companies Act 2006 changed the required information to be included in the Directors’ Report, making a business review part of the required reporting for companies other than small companies. Quoted companies were also required to include additional information ‘about environmental matters including the impact of the company’s business on the environment’.
This was a step towards a more modern look at corporate reporting, but does it need to evolve and develop further? ACCA believes that it does and has taken the future of corporate reporting as one of our Research and Insights themes.
It has been suggested that in the past there has been too much reliance on prescriptive financial reporting standards and these were often rigidly enforced and compliance-based. Very lengthy annual reports are often the result, and these do not always address the needs of all stakeholders.
It is usually the case in the modern world that an organisation will have a number of different stakeholders with different priorities and varying interests.
It has become clear that the current corporate reporting framework needs to evolve to reflect the wide range of factors that affect corporate performance. Stakeholders want to know the value of the organisation they are interested in, and the current focus on an organisation’s financial statements is insufficient to answer the question.
Financial reporting and risk are, and will remain, important aspects of corporate reporting. However, high quality decision-making can only be possible when additional information is available.
Integrated reporting (IR) has developed from the growing realisation that traditional financial reporting provides insufficient information for integrated thinking and investment decision-making. The true value of an organisation will depend in part on tangible or financial factors that will traditionally show on a balance sheet, and are perhaps fairly straightforward to account for. But the value will also depend on a wide range of other factors that are less easy to measure.
Factors such as people, energy security, natural resources and intellectual property all also have a bearing on the value of an organisation.
As a result the International Integrated Reporting Council (IIRC) was formed. ACCA is a member of IIRC, which is a global coalition of regulators, investors, companies, standard setters and the accounting profession. This coalition shares the view that communication about businesses’ value creation should be the next step in the evolution of corporate reporting.
Integrated reporting is the domain of accountants more than any other professional because we deal in information. Dialogue between multicultural teams will be important, but an accountant’s analytical skills are the key.
The purpose of the IIRC is to formulate a globally accepted and recognised international IR framework. This framework will underpin and accelerate the evolution of corporate reporting, reflecting developments in financial governance, management commentary and sustainability reporting. It will require that organisations supply material information about their strategy, governance, performance and prospects in a clear, concise and comparable format.
However, any new regime will lose some value if it is too inflexible and restrictive. The IIRC has been very clear during the consultation process that examples given are for guidance purposes. Entities are encouraged to think for themselves about which categories are most relevant to an explanation of the resources and relationships which are most material to an understanding of how they each go about their business.
Financial reporting currently relies largely on historic information, but IR aims to give a holistic view of the organisation by putting its performance and strategy in the context of its relevant social and environmental issues. Importantly, integrated reporting includes forward-looking information to allow stakeholders to make a more informed assessment of the future of a company, as well as of how the organisation is dealing with its sustainability risks and opportunities.
ACCA is part of the IIRC Working Group and our chief executive Helen Brand is a member of IIRC’s Council; therefore we decided to produce our 2011/12 Annual Report as an IR document last year. At the time of writing, ACCA is producing its second integrated report for the 2012/13 performance year. ACCA's annual report was overseen directly by ACCA’s executive team and developed by an internal staff group.
Redefining the business model
A particularly important concept in the IIRC model is the business model, and how this is embedded in the reporting process. To create value, any organisation will make use of a range of capitals, which lead to outputs (products and services) and outcomes (wider benefits to investors and society). The capitals include traditional areas, such as financial and manufactured capitals, but also place equal emphasis on other capitals: human, intellectual, natural and social.
These are areas which have profound implications for the way in which value is identified and measured, and reported. They offer new horizons to accountants who have traditionally focused on financial reporting – and opportunities to drive real leadership and performance across their organisations.
We paid particular attention in addressing the key issue of ‘materiality’ in the preparation of this report. To help us define what is material to ACCA, a series of focus groups were held with members, students and employees, as well as a cross-section of wider stakeholders.
They helped us to identify which were the most material issues that should be reflected in ACCA’s own report. The most important were brand recognition, global presence and the integrity of the examinations process.
It is clear that financial reporting, taken as whole, needs to adapt to a new investment landscape. If the destination on this landscape is improved transparency, credibility, reliability and trust, then the signposts need to point us down the same routes.